Chapter 13, Problem 13.25E

Change in accounting estimate

• LO13–3

The Commonwealth of Virginia filed suit in October 2016 against Northern Timber Corporation, seeking civil penalties and injunctive relief for violations of environmental laws regulating forest conservation. When the 2017 financial statements were issued in 2018, Northern had not reached a settlement with state authorities, but legal counsel advised Northern Timber that it was probable the ultimate settlement would be $1,000,000 in penalties. The following entry was recorded:

Loss—litigation................................................... 1,000,000

Liability—litigation................................................................... 1,000,000

Late in 2018, a settlement was reached with state authorities to pay a total of $600,000 to cover the cost of violations.

Required:

1. Prepare any journal entries related to the change.

2. Briefly describe other steps Northern should take to report the change.